Currently there are several ways to take advantage of tax breaks and adoption reimbursements. First, you should check with your state, employer and insurance company for any adoption assistance or reimbursements. There is a federal tax credit available for one-time adoption expenses up to $10,000* regardless of the type of adoption – this includes international and private placement adoptions.

The Internal Revenue Service (IRS) has developed a question and answer paper explaining the Adoption Taxpayer Identification Number (ATIN). The program, which assigns a temporary number for use on federal income tax returns while a finalization is pending for the adoption of a U.S.-born child, was implemented in January 1998.

In addition, you may download a copy of the informational brochure IRS Publication 968: Tax Benefits for Adoption from the Internal Revenue Service's Web site at http://www.irs.gov/pubs/irs-pdf/p968.pdf.

For detailed IRS regulations on the Adoption Tax Credit and Tax Exclusion (which can be printed out for use with your tax consultant), access the IRS Web site at http://ftp.fedworld.gov/pub/irs-irbs/irs-irbs.htm and select Tax Bulletin 1997-2. The regulations are published under Notice 97-9, on page 35 of the bulletin.

Flat $10,000* Federal Tax Credit for Special Needs Adoption Now Available. Beginning with their 2003 taxes, many parents who adopt a child with special needs can claim a flat tax credit of $10,160* for every adoption finalized after January 1, 2003, without having to document any adoption expenses. According to the Internal Revenue Service (IRS), “An eligible child is a child with special needs if he or she is a citizen or resident of the United States (including U.S. possessions) and a state determines that the child cannot or should not be returned to his or her parents’ home and probably will not be adopted unless adoption assistance is provided to the adoptive parents.” Therefore families of children who are eligible for adoption assistance would be able to claim the tax credit.

Families with modified adjusted gross incomes of $150,000 or less are eligible to claim the full credit. The credit cannot exceed your federal tax liability, but can be spread out over 5 years, which will allow families to maximize the amount of the credit that they can claim against their federal tax liability.

Here are some examples of how the federal tax credit could help families:

• Family One paid $3,000 in federal income taxes through normal payroll withholding, and their tax liability is $2,000. When they file their taxes for 2003 they normally would have a refund of $1,000, but because of the adoption tax credit, they will get a refund of the full $3,000 paid and will carry over a tax credit of $8,160 that they can apply against future tax liability for the next 4 years or until used up.
• Family Two has a federal tax liability of $12,000 so they can claim the full $10,160* adoption tax credit in that year and reduce their federal tax liability to $1,840. They will not have any carryover of the tax credit to following tax years.
• Family Three has a federal tax liability of $5,000 per year and they adopt a sibling group of four children who all have special needs. They would be eligible for a $40,640 federal tax credit, but they could only claim a total of $25,000 in tax credits, $5000 each year over 5 years, assuming the family’s tax liability remains the same.

See IRS Publication 968 for more information on the adoption tax credit at http://www.irs.gov/pub/irs-pdf/p968.pdf or call 1-800-829-3676 to order it.

This $10,000* federal tax credit will be a valuable resource to families as they raise adopted children with special needs. The credit can help cover some of the costs of providing services and support to meet children’s special needs. Prospective adoptive families should keep this credit in mind as they consider the resources available to them to help them care for their children with special needs.

If you have questions on the adoption tax credit, contact the North American Council on Adoptable Children at 651-644-3036 or info@nacac.org

*The tax credit amount provided here is the original federal limit. Each year this amount increases by a small percentage, for example the credit amount if you finalized in 2008 would be nearly $12,000. If you need a current tax credit figure for planning, please contact us for that data. Families Like Ours strongly advises using a trained, professional, experienced tax professional.